Jim Chanos: What’s Up With… Politics, Health Care, China and Tesla

Bloomberg Invest 2017 kicked off with Colony Capital CEO Tom Barrack. He likened President Trump to Uber and Amazon.com (AMZN), only disrupting Washington D.C. Barrack also likened Steve Bannon to a Buddhist monk.

For investors in the crowd, the highlight of the evening was Kynikos Associates founder Jim Chanos. The legendary shortseller talked politics and China. He also explained why the U.S. health care sector is rife with short-trading ideas and what it would take for him to throw in the towel on his Tesla (TSLA) short.

On the Trump Administration. Politics sometimes works in strange ways in the markets. Going back to ’09, we elected who many people viewed someone left to Lenin – a community organizer who going to nationalize the banks, raise taxes, increase the estate tax – doing a lot of business-unfriendly things. After a few rocky months the stock market tripled.

We’ve elected ostensibly, arguably the most pro-business president – at least self-described – in modern memory only matched by George W. Bush, who came in similarly. Remember what happened under Bush. We were coming in at the end of a long economic expansion that was just going to continue and go on, and instead we had two recessions under his watch including the worst financial crisis in modern memory. It doesn’t always work out the way you think. Events that conspire tend to overtake people, that’s what I learned in 40 years.

On China. China was the bogeyman in 2016 in the campaign. Following a visit to Mar a Lago, the President and Xi Jinpingseem to be best buddies. This policy could change tomorrow and that has a lot of people a little bit uncertain.

When China says “deleveraging”or “supply side reform” -- they’ve been saying these things for as long as I’ve been following China or over seven years. When you look at the numbers – I admit we’re comparing bad apples to bad apples – there’s still substantial growth in credit and capacity and all those things they say they’re trying to reign in, isn’t happening.

Forget shadow banking system for a second, bank assets and credit are still growing 2-to-3 times [gross domestic product]. The model is every bit the model I have been worried about for years – it’s just debt-driven. Last year, we think they added $5 trillion in new credit to the system, which is somewhere between 40%-50% of GDP.

People ask me, 'do you believe the numbers?' – when it comes to GDP. I kinda do and that’s the problem. They are basically using a model where you stick a shovel in the ground, borrow money and put up another building.

On U.S. health care. It’s a system that is designed to be gamed. It’s this hybrid of socialized and free market healthcare. We don’t have a free market. We have a bizarre system... The providers generally charge whatever they can and often get reimbursed for it, so there’s rent-seeking behavior.

It’s going to be hard for Republicans to [pass the health care bill], because the free market does not apply to healthcare; other industrialized nations have come to realize this. We don’t shop for health care like we do consumer goods. When your doctor says, 'you need this test,' you’re not going to Minneapolis to check out what’s available there. It’s not a free market system.

Why he's bearish on kidney dialysis companies. We have Obamacare exchange officials saying kidney dialysis is single-handedly breaking the system. Blue Cross California said for every single kidney dialysis patient they have, they need 3,800 healthy lives to cover it. It’s amazingly expensive, but some are trying to push Medicare and Medicaid patients into Obamacare to get 2-3 times the reimbursement rates under the essential health benefit package.

One of those [kidney dialysis companies] has a slide showing that 90% of their business is Medicaid and Medicare, which loses money, and 10% is commercial, which makes 110% of their profits

When he'll throw in the towel on his Tesla short. The company would have to actually start making money selling products... We think it will be burning close to $750 million to a $1 billion a quarter for the next handful of quarters. They have not finished the Gigafactory. The batteries are made by Panasonic. You have an executive departure list – the only one I’ve seen longer in the last two year’s is Valeant Pharmaceutical’s (VRX). People are leaving left right and center.

[Model 3s] are supposed to go into production in July. They’ll be competing with real auto companies in 2018. Elon Musk is trying to reposition [Tesla] into something other than an automobile company, but it’s an automobile company with a money-losing solar subsidiary. Rule of thumb: it takes about 50 cents in capital for every dollar of automobile revenues. If Musk is going for 500,000 Model 3s and 100,000 of the Model Ss and Model Xs, he’s going to need something on the order of $30-some billion in revenues. He’s going to need another $10 billion in capital to do that too. So the Teslarian should brace themselves, because they’re going to get a chance to buy a lot more stock.

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